Ian Gordon: Bundle Up for Bitter Kondratieff
Source: Source: Karen Roche of
The Gold Report
Bundle up. The bitter Kondratieff Winter looks as though it
will worsen in 2011. Longwave Group Founder Ian Gordon sees
strong signs that point to impending catastrophe, citing historic
precedents in this exclusive interview with
The Gold Report.
But despite his chilling forecast, which includes the Dow
dropping to about 1,000, Ian expects investments in high-quality
junior gold miners to pay off royally. . .because the capital
that flees the markets will flow in their direction.
The Gold Report:
In the 11 years that you've been investing in gold juniors,
you've recorded an annual rate of return of approximately 70%.
Going back to 2000, most brokers and money managers likely
would've categorized your investment strategy as very risky.
However, you've stated that you always felt it's been very safe
because you understand the Kondratieff Cycle. What about the
Cycle gave you the confidence to go long on gold and gold
I knew that the big bull markets in stocks always occur in the
autumn of the cycle; and in 1999, I was confident that the autumn
bull market that started in 1982 was coming to an end due to the
massive ongoing speculation, particularly in the dot.com stocks.
A new issue was coming to the market every day and once it did,
the price rose two to three times on the first day of issue. That
kind of speculation, and the fact that some things should never
have even been allowed to come to the market, indicated to me
that we were coming to the end of the big autumn bull market-sort
of like the frenzied days in the summer of 1929.
When such big bull markets end-as it did in January 2000 for
the Dow and March 2000 for the NASDAQ-it's a signal that you're
going into the Kondratieff Winter period. This is the time when
debt is wrung out of the economy, essentially. Knowing that, and
knowing what happened following the '29 autumn stock market peak
that signaled the onset of winter, I knew the end of the big bull
market would be extremely bullish for gold just as it was
following the 1929 stock market peak.
I was also watching the Dow:Gold ratio, which is, the price of
the Dow Jones Industrials divided by the price of an ounce of
gold. This ratio peaked in July of 1999 when it took 43.85 oz. of
gold to buy the Dow; that was the highest level this ratio has
ever been. That extreme high convinced me that the great autumn
stock bull market was ending. That stock market peak would herald
the onset of the Kondratieff Winter when debt is eradicated from
the economy. Winter is a terrible time for stocks but a very
favorable season to be invested in gold and gold mining shares;
thus, I was very confident in determining that a new and very
strong and long bull market was about to begin in gold and gold
shares. Consequently, I positioned my investment account 100% in
precious metals stock, principally gold mining shares, and the
entire investment account was committed to shares in the junior
If it started in 2000, we're now 11 years into this Kondratieff
Winter; but it's only been bad for the last two years. How much
worse will it get before it starts getting better?
It has to get a lot worse. The debt has to be wrung out of the
economy. Because we're on a pure fiat paper money system,
worldwide debt is massive, particularly in the United States. If
you look at non-public debt in the U.S.-corporate, consumer and
financial debt-it's $42 trillion, and most of that will be washed
out of the economy.
It's a very painful process. It creates massive pressure on
the creditors, principally the banks and the debtors, which
results in huge bankruptcies on both sides of the ledger. We've
already seen banks failing and that process is not finished.
We've already started to see huge bankruptcies-General Motors,
AIG, several companies that have already failed because of the
debt. The process has only just begun.
If the government is printing money to pay off some of the public
debt and the debt has to be wrung out of the system before we see
another spring, doesn't that just prolong the winter?
That's what happened following the '29 market peak, and the U.S.
was in a much better position than it is today. At that time, the
U.S. was the world's largest creditor nation; I think the total
federal government debt was $16 billion as opposed to nearly $14
trillion now. Hoover and Roosevelt threw money at the economy
trying to bail it out. They weren't successful but they did
significantly increase the federal debt during the '30s; it
increased even more during World War II.
How do you measure the extent to which debt is being wrung
The best way is by looking at debt in relation to GDP. The U.S.
debt:GDP ratio last bottomed in 1952, which coincided almost
exactly with the onset of spring in the present cycle. But I'm
not sure how we're going to see the public debt wrung out of the
system. Obviously, the intention is to try and inflate it away.
Unfortunately, during a Kondratieff Winter, you're nearly always
in a deflationary environment because, as debt is cleansed from
the economy, prices are dropping dramatically and money is coming
out of the economy. It's very difficult to increase the money
supply in that kind of environment. So I don't see the U.S.
government and the Federal Reserve being able to inflate their
way out of this predicament. In fact, the U.S. could very much be
riding down the same road as Greece, Ireland, Iceland and so on,
with Portugal and Spain now waiting in the wings to do that.
It's going to be a very, very uncomfortable time for all of
us. We're predicting that the world monetary crisis will actually
deepen in 2011. The whole world monetary system could collapse
due to this excessive sovereign debt; that's what happened from
1931-1933. At that time, every country went off gold to try and
inflate their currencies and buy their way out of the Depression.
The world monetary system collapsed and a new monetary system
didn't evolve until 1944, at
, when the U.S. dollar became the world's reserve currency. So
from the breakup of the system, there's a gap of several years
before a new monetary system is developed.
When the monetary system collapses, essentially, global trade
also collapses. After the monetary system collapsed in 1931,
world trade dropped by 75%. At that time, the U.S. could afford
to become very isolationist because it was self-sufficient in
food and oil. Great Britain resorted to trading within the
British Empire. Europe became sort of an entity unto itself. We
could see something quite similar starting to develop in 2011.
We're almost certain that will bring about trade war and,
ultimately, real war.
During the trade war that developed in 1930 when the
Smoot-Hawley Tariff Act
was put in place in the U.S., huge tariffs were raised against
foreign goods coming into the country. Of course, the Europeans
responded in kind by raising massive tariffs against American
goods coming into Europe. Essentially, Japan got frozen out,
which is why it got very aggressive looking for natural
Looking at the West, one might put the U.S. and Europe in one
bundle. In essence, many economists would put India and China in
another bundle. With the latter growing and the former either
stagnant or beginning to shrink, do you see any possibility that
China and India could buoy up international trade?
If the world monetary system collapses-and we are close to that
now-world trade collapses, too; and under the circumstances,
China or India could do nothing to reverse the situation. Anyway,
I see China as being very much the U.S. of the '20s and '30s.
The U.S. became the world's greatest creditor nation, lending
copious amounts of money to the Allies to fight World War I.
After WWI, the U.S. went on a massive industrial expansion that
included automobiles, aircraft, refrigeration, telephone, cinema,
all of sorts of things. That was really the U.S. heyday. Because
the country was so wealthy, there was a lot of bad investment.
U.S. banks had so much money that a lot of it was loaned
out-particularly going into countries, such as Austria and
Germany. In '29, once credit got more restrictive, the U.S.
banking system started to get into trouble.
I see the same thing happening now in China. Industrial growth
has paralleled or even exceeded what the U.S. experienced in the
'20s. China is now the world's largest creditor nation as the
U.S. was then. There's a massive amount of bad investment in
China; whole cities are being built that are empty-that's bad
investment, bad lending by the banks. I can see that whole system
collapsing as early as next year.
Let's go back to your outlook for 2011. You're looking at
monetary crisis and a potential failure of the global monetary
system. In that case, going to gold makes a lot of sense. How
does an investor begin to shift a portfolio toward gold, bullion,
gold mining stocks, ETFs, etc.? What would be your
The physical should be taken in hand. The only paper I can
recommend in gold is in gold mining shares. I certainly don't
want to invest in a gold ETF because it's a paper claim on the
physical. Who knows what's going to happen if this whole thing
blows up? What kind of government decrees will come out with
regards to gold and so on? If the whole monetary system blows
up-and we see a 1-in-5 chance of that in 2011-it will be much
more serious than the blowup of '31 because the whole system
appears to be imploding. People will distrust paper money. I'm
not sure how it goes into the end, but those are the kinds of
things that people have to consider. They're quite extreme.
So, is investing in gold shares a good thing? You're being
paid out in paper money and you're buying in paper money. What
happens if paper money is worthless? I don't know. I'm trying to
think that kind of scary scenario through in my own mind. But
it's something of which we should all be aware. We're basically
hanging by our fingernails above a great chasm.
You don't like gold ETFs because you don't know what a government
might do to the underlying asset. Isn't that also true of gold
mining shares? If things go wild, couldn't you see governments
putting tariffs or mining restrictions on what's coming out of
Yes, that's a worry. I don't think we would see that happening in
Canada; but in the U.S., we know that in the '30s Roosevelt
confiscated all U.S. citizens' gold. After 9/11, a Federal
Reserve spokesman suggested that to avert a panic in the market
they could buy the shares of gold companies-in effect,
nationalizing gold companies.
Do you factor in such possibilities when you're looking at junior
I do, but we'd probably get some indication if something drastic
happened. I am invested in companies that are in Alaska and
Nevada and so on. I tend to look more and more into companies
that are invested in Canada, as it is the only Western capitalist
country that has never confiscated her citizens' gold. Gold
mining is such an important industry in Canada that I just can't
see the government doing it this time, either.
But the government has nationalized industries in Canada; so what
makes you think that wouldn't happen with mining?
If you go back to the '30s, gold mining became the asset of
choice for most investors. Massive amounts of capital flowed into
the gold sector. There were major discoveries all along the
Abitibi Greenstone Belt, in British Columbia and in the U.S. By
1940, according to the U.S. Bureau of Mines, there were 9,000
operating gold mines within the country. I doubt there are more
than 500 gold mines operating in the U.S. today. If money flows
to the gold mining industry this time, as it did in the 1930s-and
I'm sure it will-a lot of this money will flow into Canada from
all over the world.
As I understand it, when you're looking at gold juniors you
follow a formula that weights management and properties to
account for 50% of what you consider a good investment. And you
want to see potential for your investment to double within 10
months. Could you tell us a little more about how you analyze
First, I never invest in a company unless I've met with
management; and that's pretty easy living here in BC. I want to
get a confidence in and a feel for management-management is the
key. I've seen good companies messed up by bad management. I've
seen companies that were likely looked upon as potentially
mediocre at best, but good management can frequently turn such
companies into outstanding investments. One example that
immediately comes to mind is
Premier Gold Mines Ltd. (
. Ewan Downie, its CEO and president, has done an exceptional job
for shareholders and has a record of being an outstanding leader
and a great manager in the precious metals arena. His stock is
trading at about $7.39, which gives it a market cap of
approximately $700 million. I think Premier has 2 million ounces
(Moz.) of gold in the ground, and growing. By any measure, it's
expensive. And it's expensive because Ewan Downie is such a good
Other than management, what's important to you?
In addition to management, I have to feel comfortable with the
properties the company has amassed and the potential that exists
for big discoveries on those properties. We certainly do look at
political risk when we're assessing companies; we don't want to
be investing in companies that are located in politically risky
Of course, I have to be confident in management and I have to
believe that an investment in the company will produce a
significant return. And as you pointed out earlier, I have been
able to average about 70% a year over the last 10-11 years in my
own portfolio despite taking a massive hit-as did most people-in
Every time I buy shares in a company, I must be able to see
the potential for the share price to double within 10 months.
This potential may be because I am anticipating good exploration
results or seeing additional ounces being discovered. I look for
companies that are not yet recognized by investors because of
poor public relations. In some cases, I'll find this double price
potential in a company that has gone out of favor due to a lack
of exploration progress, but I might see that things are
improving. However, because most investors have grown tired of
such companies, they won't be paying attention.
One of my favorite companies in this category is
Golden Goliath Resources Ltd. (TSX.V:GNG; OTCPK:GGTHF)
, which has been around for more than 10 years with great
properties in Mexico. Many of these properties have seen
significant past gold and silver production. Yet the company has
failed to make any important discovery and investors are looking
at other opportunities. Over the past two years, however, Golden
Goliath has been putting together a large silver/gold discovery
on its Las Bolas property. This has attracted the attention of
Agnico-Eagle Mines Ltd. (TSX:AEM; NYSE:AEM)
, which has recently concluded an earn-in agreement with Golden
Goliath on the property.
Given how gold has taken off in the last year or so and the focus
on the sector has increased tremendously, do any good deals
remain in junior gold mining?
I think so. Three companies I have posted on my website
immediately come to mind, and I post only companies that I think
will do well for investors. One is
Lincoln Mining Corporation (TSX.V:LMG)
, which probably will go into production in Nevada in 2011. It
will produce about 50,000 ounces (50 Koz.) per year, and it's
going to be very profitable. Paul Saxton, CEO and president, has
put about five mines into production. It's trading at about
$0.24. Investors aren't really paying much attention to it, and I
think it's going to do well.
Another company is called
Temex Resources Corp. (TSX.V:TME; FSE:TQ1)
. All of its properties are along the Abitibi Greenstone Belt in
Ontario. The company has an NI 43-101 resource of about 1.2 Moz.
from surface in an area called Shining Tree. With 1.2 Moz., I
think Canaccord has said an ounce in the ground should be valued
at about $100; Temex is trading at a market cap of about $40
million. So this company should be trading three times that,
particularly considering its location. Temex also has a 60% (and
Goldcorp a 40%) interest in the past-producing, high-grade
Hallnor Mine near Timmins, Ontario. The company has a lot of
money in the bank, and it should be able to post plenty of good
news throughout 2011.
What's the third one?
Atlanta Gold Inc. (TSX.V:ATG)
has a tiny market cap of about $14 million. It has 475 Koz. at
surface in an old mining area about 65 miles northeast of Boise,
Idaho. Essentially, there's been no publicity from this company
so investors are overlooking it and are unaware of the huge
potential to add significant high-grade ounces at depth.
Atlanta's chairman, James K. Gray, was cofounder of Canadian
Hunter Exploration Ltd., which became one of Canada's largest
natural gas producers. The company was taken over by Burlington
Resources. Jim and his partner believed that if you drilled
deeper, below the shale in Alberta, you'd find more gas. They
drilled deep, found the gas and made Canadian Hunter a huge
success. Jim is convinced that Atlanta Gold will reap similar
success by drilling deep on its Idaho property.
I really like
Barkerville Gold Mines (TSX.V:BGM)
in central BC. It's got a NI 43-101 gold resource of about 800
Koz. gold. But, I think we are going to see that resource grow
considerably when the company announces a new 43-101. It's in
production right now, en route to producing 50 Koz. gold a year.
It's putting in another mill, too, so it will be able to ramp-up
production to 100 Koz. I like it because the management has been
able to put together a very significant land position in the
Barkerville camp, which was an old mining area in about 1860 and
again in the 1930s, which, of course, is the time of the previous
Kondratieff Winter. I think there were three mines discovered on
the properties and put into production. I like the location very
much; I like the idea that it's around where old mines were in
production and so on. I really believe there is a potential to
add significant gold ounces on the property and cash flow is
pretty good, too.
When will the new mill come on?
The company's just getting permitting from the BC government, so
I think it will be onstream within six to eight months. Already
50 Koz. is very profitable. Because a lot of the ore has to be
trucked to the mill right now, the cost of production is probably
about $600/oz.; but with gold at $1,400, that's still very nice
You were going to mention another.
Fire River Gold Corp. (TSX.V:FAU; OTCQX:FVGCF)
is in Alaska and is permitted for production, which probably will
begin in July 2011. It's been a difficult mine, but it's a very
high-grade mine. The company will start mining the tailings
probably around July 2011. Then it'll go on to underground
mining. It's got roughly 200 Koz. earmarked for production at
this point. The company confidently predicts 50 Koz. of
production per year and also believes that it will be able to
replace each year's production through exploration. Again, the
costs are going to be about $600/oz. for production, because it's
a remote area-a fly-in camp where all supplies have to come in by
air. But still, at $600 it's a very profitable mine. Fire River
has put together an exceptionally good team to bring this mine to
Will the 50 Koz. you mentioned come from tailings?
Some of it. Later in 2011, the company will get into the
underground production as well, where it's very high grade-a
little less than an ounce per ton. So it will be a mix.
Very good. Any other companies you'd like to share with us?
Actually, I'll just give a brief mention to a couple of other
companies. I like
Freegold Ventures Limited (
. The company has been restructured by, among others, current
President Kristina Walcott and it's done a great job. Freegold
Ventures' three properties are in Alaska and each of them already
has significant gold in the ground. I think there is potential
for this gold to grow much larger. I am a huge fan of the Golden
Summit Project, which I visited some years ago. It's got lots of
African Queen Mines (TSX.V:AQ)
. Irwin Olian, the CEO, is a quiet winner and has done a great
job in putting this company together. All the company's
properties, and there are lots of them, are in Africa. These are
great properties; I am particularly enthused by the King Solomon
Gold Project in Mozambique. I expect we shall see some exciting
news coming from this company throughout 2011.
You've given investors some good information to consider. Let's
hope it's not as bad as you think it's going to be.
I don't want it to be this bad but things look pretty bleak,
especially when taken from a historical perspective.
When we reach that turning point where the Dow begins to dive,
won't the junior mining stocks also drop rapidly?
They didn't in the '30s because all the capital flowed to gold.
There were huge discoveries. I was looking at one today-
Gold Inc. (TSX:PKL)
. The Pickle Crow Gold Mine is in Pickle Lake in Northern
Ontario. There wasn't even road access to Pickle Lake in 1930s,
but it was discovered by a junior exploration company in 1934 and
put into production. You can't make discoveries and put mines
into production without a significant source of capital. From
1933-1940, worldwide gold production soared by 66%. All that
increase in production had to have been financed.
So junior miners will have such opportunities due to the capital
flowing toward gold.
Right. People like my friend, Eric Sprott-who runs a whole host
of funds as the chairman of Sprott Asset Management-are extremely
bullish on the precious metals because, like me, he sees the
potential of a significant economic and financial worldwide
disaster. He, too, is very frightened about the potential outcome
of a worldwide economic collapse. And, much the same as I do, he
sees that money will flow into precious metals, including these
junior companies. That's where he's invested and that's where I'm
You and many other speakers at the 2010 San Francisco Hard Asset
Conference were pretty consistent in the message about expecting
worse than we saw last year and possibly even worse than
We called that one exactly right with a piece called
This Is It
, which was written in 2007.
Your investment strategy also has proved exactly right. You see
what most of us miss. We appreciate your insights into the
A globally renowned economic forecaster, author and speaker,
Ian Gordon is founder and chairman of the
, comprising two companies-Longwave Analytics and Longwave
Strategies. The former specializes in Ian's ongoing study and
analysis of the Longwave Principle originally expounded by
Nikolai Kondratiev. And with Longwave Strategies, Ian assists
select precious metal companies in financings. Educated in
England, Ian graduated from The Royal Military Academy,
Sandhurst. After a few years serving as a platoon commander in a
Scottish regimen, Ian moved to Canada in 1967 and entered the
University of Manitoba's History Department. Taking that step has
had a profound impact because, during this period, he began to
study the historical trends that ultimately provided the
foundation for his Long Wave theory. He has been publishing
Long Wave Analyst
since 1998. Eric Sprott, chairman, CEO and portfolio manager
at Sprott Asset Management, describes Ian as "a rare breed in the
investment advisor arena." He notes that Ian's forecasts "have
taken on a life force of their own and if you care to listen, Ian
will tell you how it will all end."
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1) Karen Roche of
The Gold Report
conducted this interview. She personally and/or her family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Gold Report:
Barkerville Gold Mines and Fire River Gold.
3) Ian Gordon: I personally and/or my family own shares of the
following companies mentioned in this interview: Golden Goliath,
Temex Resources, Atlanta Gold, Barkerville Gold Mines, Fire River
Gold, Freegold Ventures and African Queen. My company, Long Wave
Analytics, is paid by the following companies: Golden Goliath,
Lincoln Mining, Temex, Atlanta Gold, Barkerville, Fire River
Gold, African Queen and Premier Gold Mines.
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